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Ed's Blog

Good news from the Office of the Comptroller of the Currency, the nation's national bank safety regulator. In its prepared testimony for a House Financial Services subcommittee hearing starting at 10am today the OCC firmly rejects proposals (HR 1909 and HR 6139) by payday lenders to hide out at the OCC to avoid regulation by the CFPB or states. The OCC witness, Groveta Gardineer, Deputy Comptroller for Compliance Policy, says in her prepared remarks:

"[W]e are concerned that H.R. 6139 would hurt the very population of consumers that it seeks to assist, and would encourage the development of businesses with unsafe and unsound concentrations in financial products and services that have serious consumer protection, compliance, safety and soundness, and other risks including Bank Secrecy Act and Anti-Money Laundering (BSA/AML) concerns. The effective result of H.R. 6139 would be to create a class of federally chartered [non-banks to be known as NCCCs] focused on consumer credit products of the very nature and character that the OCC has found unacceptable based on consumer protection and safety and soundness concerns. In particular, it is our experience that the profitability of many of the types of small dollar, short-term loans that NCCCs would likely seek to offer is dependent on effectively trapping consumers into a cycle of repeat credit transactions, high fees, and unsustainable debt."

"The provisions of H.R. 6139 supporting and encouraging the use of the internet in this type of lending, when combined with the bill’s elimination of state jurisdiction, raise particular concerns as it seems aimed at exchanging existing state oversight and consumer protections for enhanced business opportunities. Currently, some institutions operating online consider themselves beyond state lines and therefore not subject to local consumer protections. But the transactions and the potential for consumer harm remain very locally real. A long-distance loan without local protections is not good for the consumer."

One point that supporters of this legislation don't seem to want to understand is this: Just two years ago, after dozens of hearings into the causes of a recent massive financial collapse that some of you may recall (the American people and economy are still gasping for air), Congress established the new Consumer Financial Protection Bureau. Congress gave the bureau certain responsibilities and certain powers. Specifically, among the most important problems identified by the Congress was the growth of predatory payday lending, so it gave the bureau specific and full supervisory powers over payday lending. The bureau received these full powers from Congress over just three identified non-bank sectors: payday lenders, mortgage lenders and private student lenders. What exactly has changed that should cause the Congress to change its mind about the importance of payday lending as a serious problem? Nothing.

Back in 1999, Consumers Union issued a report, Wolf in Sheep's Clothing, describing some of the shape-shifting efforts by the payday lenders to avoid regulation of their high-cost, unsustainable debt-trap loans. In Texas, they claimed to leasing back your own goods or selling you ads in an ad book or even selling you certificates to purchase items in a catalog. More recently, they've had some success hiding from Texas rules by claiming to be credit services organizations. Nationally, although federal bank regulators eventually eliminated their "rent-a-bank" model, the lenders have switched where possible to the "rent-a-tribe" and Internet lending models to avoid regulation. That's why the CFPB, the first federal regulator with full authority over both the bank and non-bank financial systems, represents the best hope to rein them in. And that's why the payday lenders are trying to find a place to hide.

As I described in my previous blog on this effort, the payday lenders behind this bill have the idea that being regulated by the OCC would be a get out of regulation free card. Meet the new OCC, not the same as the old OCC, and that's good. More from a July 2012 survey on Payday Lending In America from the Pew Charitable Trusts.